Team with Laptop

How APIs reduce risk in fintech partnerships

Digital transformation is one of the most pressing challenges facing financial institutions today, especially in a post-COVID-19 world. The global pandemic has already pushed millions of customers to make their first-ever digital transaction, while others are increasing their use of online banking and contactless payments.

In a study from Finextra, 81% of banking executives surveyed said that collaborating with partners was the best strategy to achieve digital transformation. However, these projects must balance the urgency of maintaining and upgrading core systems while sustaining business continuity and minimizing risk.

One of the most prominent limiting factors for fintech partnership is technical integration. The amount of work required to connect core systems determines project lead times, internal resource requirements and development cost, as well as security and compliance for customer data.

The most promising solution is Open API integration. By leveraging pre-existing data routes, financial institutions can capitalize on innovation while optimizing implementation and cost to deliver modern customer experiences.

The technical barrier

The core value of fintechs in digital transformation is the provision of technology solutions that help financial institutions extract more value from existing assets, create new customer experiences or optimize efficiency. Every one of these scenarios requires an effective means of rapid data exchange. However, in many situations the fintechs are running drastically different systems from the financial institutions, with varying levels of speed and accessibility.

Nearly 50% of banks do not upgrade old IT systems as soon as they should. This creates systems that are increasingly difficult and expensive to operate and maintain, according to Deloitte.  Meanwhile, in spite of their own innovation, the International Institute of Finance found that many fintechs lack the experience and expertise to integrate legacy technology at an enterprise level.

If not addressed, this technical hurdle can lead to increased costs, slower ROI and increased friction in the bank-fintech relationship. An increasingly popular option is using Open APIs, with 86% of banks looking to use APIs to enable Open Banking capabilities in the next 12 months.

Leveraging open connections

Open Banking is rapidly shaping the future of financial services, although it’s distributed unevenly. The UK’s Open Banking directive has been in effect since January 2018, with Europe following in 2019. Meanwhile, the Boston Fed this year described the U.S. as the ‘least likely among global governments to enact open banking regulation.’

This fragmented landscape makes it harder for fintechs to target and develop software for global financial institutions, since they lack the scale to integrate to each institution. This, in turn, limits the range of solutions available to the institution and renders every collaboration project unique and more resource intensive.

The alternative is for the institution to integrate based on cloud-based open banking platforms. As a result, instead of integrating individually to every fintech, the bank needs only a simple integration to the platform to access a range of specialist fintech-built app solutions. The immediate value of this approach is a huge reduction in cost and time across fintech projects, benefiting in faster access to innovation. Without the need to build unique integrations between legacy and modern back-end systems, financial institutions can significantly reduce development times, internal resource requirements and scope creep. Moreover, by using an established, pre-tested integration, financial institutions can reduce risk and limit the likelihood of faulty integrations damaging customer experience.

Finastra’s open developer platform and app marketplace help to unlock innovation in financial services at scale. With fully vetted and approved fintech apps pre-integrated leveraging Open APIs, financial institutions can focus on sourcing and testing solutions with full confidence in their functionality and performance.

Creating a collaborative future

Digital service delivery has moved beyond consumer banking, driving retention in every area from capital markets to corporate banking.

As financial institutions focus on more digital journeys, APIs will play a crucial and key role to unlocking value from data. In this uncertain world, learning and iterating will be key to gaining competitive advantage. Open APIs enable a learn-fast approach to fintech collaboration that drives innovation and value across your business.

To find out about how Finastra can help you accelerate your digital transformation while mitigating risk, talk to one of our team today or take a look at some of the exciting apps already available on our marketplace.